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Talking Points

  • Candlestick analysis can be worked into any active Forex trading strategy.
  • Dark Cloud Cover is used to identify changes in a Bull trend.
  • Traders can use candles as a confirmation tool, while working with an existing strategy.

For most Forex traders, trading price action starts with the ability to understand and read candle charts. Oncetraders understand the basics, candles can be linked together in patterns to confirm price changes and market direction. One of the most used candle patterns is known as Dark Cloud Cover. Today we will review the Dark Cloud Cover pattern and how it can be used into an existing trading strategy to time market reversals.

Using_Candles_to_Time_Market_Reversals_body_Picture_2.png, Using Candles to Time Market Reversals

Dark Cloud Cover

The Dark Cloud Cover candle pattern is a reversal pattern comprised of two candles. Pictured above we can see that the pattern suggests a reversal in a market uptrend. To identify this pattern, traders must first identify a long blue candle. This blue candle represents strong bullish momentum through the completion of the designated period. The second candle should continue the markets uptrend, creating a large upside wick, but close with a downward bias. This means the second candle will close red in color, and should also close near the previous days open.

This pattern is used specifically to identify when sellers are returning into the market. The long wick of the second candle suggests that buyers no longer have control, and are unable to push the market higher. With this sudden loss of bullish momentum, it is likely to see more sellers enter into the market and attempt to push price towards lower lows.

Let’s look at a current example.

Learn Forex – EURGBP Dark Cloud Cover

Using_Candles_to_Time_Market_Reversals_body_Picture_1.png, Using Candles to Time Market Reversals

(Created using FXCM’s Marketscope 2.0 charts)

Uses in Trading

Above we can see a Dark Cloud Cover candle pattern on the EURGBP daily chart. The daily graph has been in a long standing established uptrend, but notice how there has been price retracements along the way. This highlight retracement was concluded with a Dark Cloud Cover, indicating sellers returning back in the direction of the primary trend. This pattern cued price action traders of a lower high forming, before price trended down an additional 400 pips.

Once you have familiarized yourself with this candle pattern, you can then easily work it into virtually any trading strategy. Most traders will use I this formation as a confirmation tool such as SSI, to signal a change in market direction. If the market is moving in a downtrend a Dark Cloud Cover can signal renewed selling opportunities for trend traders.

---Written by Walker England, Trading Instructor

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